The news that the U.S. Department of Justice is forcing Entercom to spin off three Denver radio stations it was set to acquire from Lincoln Financial is raising the question as to whether once again the Department of Justice will be more closely scrutinizing radio deals. The answer is maybe and maybe not.
The FCC’s ownership limits allow a Denver radio broadcaster to own eight stations in the market. The Entercom-Lincoln Financial transaction abided by that FCC limit of eight stations. But, because the Entercom-Lincoln Financial transaction was above certain financial benchmarks, the Department of Justice got involved even though the FCC consented to the license assignments in mid-June. Under the Hart-Scott-Rodino Act (“HSR”), the transaction could not proceed without the further consent of the DOJ.
An HSR examination of a transaction kicks in whenever the sale price exceeds $76.3 million, and either a buyer or seller has sales or assets of at least $152.5 million and the other party to the transaction has sales or assets of at least $15.3 million (rising each year with inflation). If both criteria are present, the seller and buyer must submit a detailed showing to the Department of Justice demonstrating that the transaction will not be anticompetitive.
In the Entercom-Lincoln Financial acquisition, the Department of Justice was not convinced that the transaction would not be anticompetitive. The DOJ claimed in a court filing that Entercom’s acquisition of the Lincoln Financial Denver radio stations would impair the Denver MSA radio advertising market targeting English-language listeners. The Department of Justice based this claim on an “Herfindahl-Hirschman Index” (“HHI”) calculation.
HHI for a market is calculated by adding the squares of the shares of each competing firm in a market. Thus, in a simplified example, a market with three competitors having shares of 40%, 35% and 25% would have an HHI of 40² + 35² + 25², or 1600 + 1225 + 625 = 3450.
The Department of Justice considers any HHI over 2500 to signal a highly concentrated market. Further, the DOJ claims that an HHI increase of more than 200 points following an acquisition to be anticompetitive. In the Entercom-Lincoln Financial transaction, the HHI was calculated to be over 3500 following the acquisition.
Rather than go to court and wage a lawsuit against the Department of Justice with an uncertain outcome, Entercom and Lincoln Financial on July 14th proposed a settlement. Entercom will sell to Bonneville one Denver station it already owns and the three Denver stations it was set to acquire from Lincoln Financial, and Entercom will receive KWSD-FM, Los Angeles plus $5 million cash in return.
So, is this recent examination of a radio transaction by the Department of Justice a harbinger of an increased scrutiny of consolidation? As succinctly stated above, maybe or maybe not.
There are few radio-only transactions that meet the HSR size of $76.3 million. For at least the last decade since the FCC adopted its revised ownership rules using BIA market size and numerical limits on ownership, the Department of Justice has shown no inclination whatsoever to review any radio station transaction that does not require HSR review. Further, the FCC itself, when confronted with allegations of excessive concentration, has uniformly taken the position that, if the transaction meets the FCC’s numerical ownership limits, the FCC will approve it. Therefore, at this point based upon historical DOJ behavior, unless a transaction is large enough to exceed HSR limits, it is unlikely that the Department of Justice will institute a review.
One aspect of the Department of Justice review that might hold future significance for radio transactions is the DOJ’s approach in the Entercom-Lincoln Financial transaction to consider the relevant market as including only English language broadcast stations. The DOJ analysis considered whether, as a result of the transaction, prices could increase for Denver advertisers targeting English language radio listeners. If this market analysis were to be likewise applied to a foreign language broadcaster, almost no major purchase of a foreign language group by another broadcaster also owning same-language stations would be approved.
More disquieting, however, is the Department of Justice radio market definition as “the sale of radio advertising time to advertisers targeting English language listeners in the Denver MSA”. The DOJ appears not to have received the FCC’s memo barring “no Hispanic” advertising dictates. The DOJ complaint blithely and without foundation states that “[m]any local and national advertisers … consider English-language radio to be particularly effective or necessary to reach their desired customers … [and do not consider] non-English language radio, such as Spanish radio … to be a reasonable substitute.” This statement unfairly tars both broadcasters and advertisers with the scurrilous charge that radio advertising is ethnicity-based.
Every broadcaster is required to certify on its license renewal application that its broadcast station advertising agreements do not discriminate based on race or ethnicity. There is no evidence presented or otherwise suggested that either Entercom or Lincoln Financial accepts advertising based upon the ethnicity or non-ethnicity of its audiences. If the DOJ has actual evidence that advertisers are discriminating based upon ethnicity in the acceptance of radio advertising purchases, it should do something about it. Otherwise, it appears that the central premise of the DOJ complaint against this transaction is ill-founded.
For the future, while highly speculative, if the DOJ were to define the relevant market sought by advertisers by race, gender or music preferences, this particular case could indicate huge difficulties for large radio station consolidations, even assuming FCC numerical ownership limits are met. For now, however, most in our industry need not worry about a Department of Justice review of a broadcast station transaction as in all but the largest transactions, the HSR criteria triggering a DOJ review are far from being met.